Another brick in the wall…of worry
All too frequently over the last few months we have been presented with an increasing raft of negative news, adding bricks to the market’s wall of worry. This month the markets had difficulty overcoming the wall of worry, as investors grew increasingly nervous, with the FTSE 100 just managing to scrape into positive territory up 0.38% over the course of April, the US S&P 500 in GBP terms was down 4.36% and the MSCI World Index fell 1.95% in GBP terms.
As we are all too aware the inflation genie has escaped, with the latest year on year UK CPI inflation reading of 7% and in the US the year-on-year CPI inflation is currently at 8.5%. These price pressures have been driven in the main by the Covid related reopening constrains with supply chain bottlenecks and labour shortages, China’s ongoing zero covid policy shutdowns, as well as the effects of the Russian invasion of Ukraine, which is now in its third month. The most notable knock-on effect of the war is the rapid rise in commodity prices, most notably oil, gas, and grains. These prices are now filtering down to the consumer as our energy costs are ramping higher and the grocery bill has also begun to rise.
Whilst our central bankers target inflation at a sustainable level of around 2% per year, they do not like inflation that appears to be out of control, especially after they have contributed to it with all the emergency measures, they put into place through 2020 and 2021 to help the economy through the economic shutdown. The trigger for the most recent market declines were the comments from the US Federal Reserve Chair, Jerome Powell, who very clearly indicated that the US Central Bank is committed to raising interest rates “expeditiously” to bring down inflation and that “…It is absolutely essential to restore price stability.”
The market reacted sharply to the downside as investors sensed that the central bank would accelerate its interest rate hiking trajectory, with a number of sizeable hikes of half or even three quarters of a percent, over the next number of meetings. Investors are concerned that these large rate rises could shock the system and force the economy into a liquidity crunch and recession. For this reason, the stock market’s defensive sectors such a utilities and consumer staples have performed well, whilst other sectors that do well through periods of recovery and growth have been sold down.
It is clear that the world’s central banks have a very difficult job to tame inflation whilst maintaining the economic recovery, as they aim for the so called ‘Soft Landing’. However, there are signs that inflation could already be on the verge of peaking as some commodity prices have begun to lower and consumers have started to reduce their spending, as price increases begin to bite into household budgets. Of course, the short term remains clouded with uncertainty, and we will need a few more months of data before any trends become obvious. However, whilst the market has already priced in a nasty recession, this could well be overdone, given we may see inflation naturally reduce in the coming months. It is important to bear in mind that as new data sets come through, the stock market will begin to look out beyond the short term and eventually price in a return to a sustainable economic recovery.
It is therefore important that during these periods’ investors continue to stay the course, sticking to their investment mandate that fits their long-term objectives and risk tolerance. This discipline will help prevent the temptation to sell when it looks like the ‘wall of worry’ is too big for the markets to tackle. Your Casterbridge investment team are continuing to hold the steady course with some cash on the side-lines, looking for opportunities to invest into at these lower levels.
This update is for information only and does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. The views and opinions within this document are those of Casterbridge Wealth at time of writing and may change without notice. They should not be viewed as indicating any guarantee of return from an investment managed by Casterbridge Wealth nor as advice of any nature. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.